From Unilever Plc to Colgate-Palmolive Co., consumer goods makers in India are facing distribution blues that have nothing to do with pandemic-induced shortages and bottlenecks. The trusted middlemen that brands have traditionally relied on to reach millions of small neighborhood stores in 8,000 towns and 660,000 villages are in revolt.

It’s a mutiny that the multinationals have invited upon themselves.

About 90% of what gets consumed in the continent-sized economy flows through a pipe known as “general trade”: Brands appoint third-party distributors who stock bulk inventory, despatch goods in small quantities to shops in their area, collect cash and offer retailers unsecured credit at zero interest (without the cumbersome “know-your-customer,” or KYC, checks of the formal financial system).

Distributors also take the onus of compliance with existing rules and regulations for the brands as they’re the ones dealing directly with the the last-mile outlet, known as “kirana.”

Each of these services is important in its own right. Together, they’re worth at least 11.5% of the final price of merchandise, estimates Sumit Aggarwal, a US-trained engineer who returned to run his family’s consumer goods distribution business in north India. Yet, the distributors’ share of the pie is barely 5%-to-6%. The rest of their value addition benefits other stakeholders, including consumers.

If the pipe is only now gurgling with discontent, it’s because a new breed of rivals has arrived.

The price at which distributors get merchandise from brands allows for only 10%-12% margins for retailers. Apps are offering as much as 20%. Since none of the new-age intermediaries are operationally profitable, the deep discounts are very likely backed by investor capital, of which there is no shortage at present. Retailers are switching to more modern suppliers, and the traditional distribution chain is up in arms.

The Economic Times last month chronicled the story of Vipresh Shah, a Reckitt Benckiser Group Plc distributor in a small town 200 miles south of Mumbai. When the newspaper caught up with him, Shah, who has been selling Dettol bars to shops in his area for 14 years, hadn’t had a single order in eight days. Storeowners are buying the same soap 15% cheaper on the JioMart Partner app and accusing Shah of ripping them off.

Daring to take on the behemoths, the middlemen are sending an SOS: “Don’t turn us into a bunch of frustrated Willy Lomans from Death of a Salesman. We, too, can digitize and compete.” Colgate, which is facing a similar embargo on its Max Fresh line of toothpaste, has been warned by an association of traders that its products may vanish from retail outlets in Maharashtra by February. The ban might extend to other states as well.

It probably won’t come to that. Small and midsized intermediaries are scattered across the country. While they have temporarily come together in one state, they don’t have the staying power for a prolonged, nationwide strike against the far more resourceful producers. (According to latest news reports, the All India Consumer Products Distributors Federation has suspended its boycott of Unilever, though the campaign against Colgate continues.)

The mobile internet is transforming the retail landscape in India. Pure e-commerce, the kind offered by Amazon.com Inc. and Walmart Inc.’s Flipkart, is still a minuscule part of overall consumer spending. But owners of mom-and-pop kirana shops are increasingly whipping out their smartphones to source goods as cheaply as they can. Credit, which was the No. 1 reason for them to rely on distributors, is now being offered by a whole range of new fintech players. The combination of digital and physical commerce is expected to account for most of the $700 billion expansion in Indian retail by 2030 and half of new jobs.

Technology-led disruptions will fundamentally enhance the productivity of commerce. But the conventional trade channel doesn’t deserve to be left behind. “There’s room for everyone,” says Aggarwal. “If brands ignore general trade, and distributors’ sales people lose their jobs, apps and other bulk suppliers will inevitably use their market power to raise prices. That won’t be good for anyone.”

Instead of letting their long-term partners in the country fall by the wayside, brands must help the direct trade channel embrace technology to become more efficient and profitable. It won’t take much by way of handholding. With simple digital tools, distributors can have access to verified customer KYC, evaluate and underwrite credit risks and present a transparent account of their services in a language financiers can understand. The middlemen will become more bankable, their cost of capital will go down. Aggarwal is helping the Mumbai-based fintech ePayLater roll out some of these innovations.

Households in India withstood two debilitating waves of the pandemic without much fiscal support from the government beyond free food. Research has shown that it isn’t so much the formal financial system that helped them survive the lockdowns and the elevated medical expenses, but informal credit from shops. Where will a hole-in-the-wall kirana obtain the resources to be a lender of last resort for the bottom of the pyramid in remote towns and villages? The answer lies in the traditional distribution chain, nurtured by a previous generation of multinational managers. Their successors shouldn’t let a myopic vision of technological change destroy this important safety valve.

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